CIE AS SAMPLE ESSAYS

These theories are often cited to justify free trade agreements and the reduction of tariffs and quotas. However, these theories ignore the cost of transporting goods to another country; which is unrealistic in the global world. In reality, shipping, logistics, and tariffs add significant costs to trade, reducing the gains from specialisation. For example, landlocked countries or those far from major markets face higher costs, making trade less beneficial than the theory suggests. This limitation weakens comparative advantage’s predictive power because high transport costs can offset cost savings from specialisation, making local production more viable than international trade.

Another limitation of the theories is to assume that trade occurs between only two countries producing only two goods, which oversimplifies real-world trade dynamics. In reality, international trade involves multiple countries and thousands of goods and services. Countries often trade in intermediate goods, raw materials, and technology, rather than just final products. For instance, a car manufactured in Japan may have components sourced from multiple countries, making trade patterns much more complex than the two-country, two-product model suggests. This limitation reduces the practical accuracy of the theories because real-world trade decisions are influenced by global supply chains, geopolitical factors, and trade agreements, not just relative efficiency. The assumption fails to account for multilateral trade relations, where countries engage in trade with multiple partners simultaneously, often balancing trade deficits and surpluses across various industries.  Additionally, regional trade agreements like ASEAN, the EU, and NAFTA facilitate complex trade flows, demonstrating that trade decisions are not solely based on comparative advantage but also geopolitical and regulatory factors.

The theory of comparative advantage assumes that production operates under constant returns to scale, meaning that doubling inputs results in doubling output without efficiency gains or losses. In reality, firms often experience economies of scale, where increasing production leads to lower average costs per unit. Large-scale production allows firms to spread fixed costs, improve efficiency, and negotiate better prices for raw materials. For example, a country that invests heavily in the automobile industry may develop a competitive cost advantage over time, even if it initially lacked a comparative advantage. This limitation weakens the static nature of comparative advantage because long-term industrial growth and technological advancements can create new advantages that the theory does not predict. Countries can develop comparative advantages through strategic investment, innovation, and government policies, rather than relying solely on pre-existing relative efficiencies.

Despite the limitation argued earlier on transport costs, comparative advantage still holds in many cases because technological advancements in shipping and logistics (e.g., containerization, lower fuel costs, and supply chain efficiency) reduce transport barriers over time. Additionally, many industries, especially in services and digital products, have minimal transport costs, making the theory highly relevant for modern economies. Hence it goes to prove that countries still trade when the cost savings from specialisation exceed transport costs, meaning that the principle of comparative advantage remains valid as long as trade is profitable. For example, despite the distance between China and the U.S., trade flourishes because mass production efficiencies outweigh shipping costs, demonstrating that the theory is still applicable when cost differences are large enough.

Furthermore, comparative advantage still explains why trade happens. Even with economies of scale, countries still specialize in relatively more efficient industries and benefit from trade. Moreover, in many industries where economies of scale are limited; such as agriculture or traditional manufacturing; the theory remains highly applicable. The fundamental principle of specialization and trade leading to efficiency gains remains relevant. Instead, it suggests that comparative advantage should be viewed as a dynamic concept that evolves with industrial growth and changing cost structures.

In conclusion, while the theory oversimplifies real-world trade by ignoring transport costs, trade occurs only between two countries and constant return to scale; its core principle that specialization leads to efficiency and mutual benefits remains relevant.